How Incentives Can Build Good Habits

Economists have long been interested in the study of incentives – something that motivates an individual to perform an action. Traditionally, the focus was put on tangible incentives, particularly monetary rewards.

Employers, for example, frequently use such incentives to motivate their employees. Unfortunately, this approach to motivating people may backfire. Research has shown that tangible rewards can reduce intrinsic motivation, which occurs when people perform an activity due to the satisfaction derived from something inherent in the activity itself. Extrinsic incentives can be detrimental in the long run if they “crowd out” intrinsic motivation.

Given these findings, should initiatives to encourage positive behavior avoid monetary incentives altogether? Definitely not. Researchers are still debating the role of intrinsic and extrinsic incentives in different contexts. Perhaps not surprisingly, some researchers have found that, on the whole, intrinsic motivation and extrinsic incentives are both important to explain performance.

The problem with using extrinsic incentives to encourage behavior, then, is not necessarily about effectiveness but about cost. Paying someone $1,000 per day to walk for a mile should work well in both the short run and the long run, but it's not feasible from a financial perspective. Behavioral economists are interested in understanding how we can foster behavior change with extrinsic incentives on relatively small budgets.

Uri Gneezy, a behavioral economist at UC San Diego, has extensively studied how incentives can positively influence behavior. His introductory chapter published in the Behavioral Economics Guide 2019 outlines four ways in which incentives contribute to behavior change:

1. Creating Habits

Starting is often the hardest part when it comes to building a new behavioral routine. Incentives, even if they are relatively small, can help get Sarah to the gym a few times to build “habitual stock.” After a few visits, she'll be more likely to continue even when the incentives have been removed. A study co-authored by Gneezy suggests that incentives can have no effect or indeed backfire when people who are already regularly attending the gym receive extrinsic incentives to exercise, presumably by “crowding out” intrinsic motivation. For previously nonregular gym-goers in the study, however, incentives had a lasting positive effect on behavior.

2. Breaking Habits

If incentives can help build up habitual stock, the same should be true when they are used to reduce undesirable behavior. Gneezy references a study on encouraging smoking cessation among pregnant women, which found that 27% quit smoking completely after an initial period that incentivized them with shopping vouchers.

3. Providing Upfront Incentives

One of the problems with behavior change is that it brings costs in the present moment (e.g. eating less unhealthy food) and delays benefits (e.g. weight loss). It can be difficult for people to engage in healthy behavior if the tasty burger and ice cream can give us immediate satisfaction, while abstaining from them has benefits that are more intangible and in the future. If Paul is an impatient person, his behavior is more likely to be changed for the better if the incentives are provided to him as soon as possible or if he commits to allowing himself to engage in “want” activities, such as watching his favorite Netflix show, only when he’s doing “should” activities, such as running on the treadmill, at the same time.

4. Removal of Barriers

A final way in which incentives can support behavior change is by removing financial obstacles to change. For example, Sarah’s nearest gym may be too expensive for her budget and she lacks the motivation to travel far to a less expensive location. Gneezy cites a recent study with college students, which showed that this can be an effective strategy. In the research, students who received a free gym membership (worth about $140) for a semester attended the gym more often – three times more often than those who did not receive an incentive. (As a result of gym attendance, the academic performance of incentivized students also increased.) These results suggest that financial subsidies may be a promising avenue to behavior change in some contexts.

Gneezy concludes by noting that we often don’t understand how incentives work. It’s the role of psychologists and economists to investigate how incentives interact with other motivations to produce long term outcomes, whether in the domain of health, productivity, environmental protection, or savings. Incentives are one of many tools to implement behavior change in an effective and scalable way.